Can Tech Innovation Stop Nuclear Terrorism?

1. Yuri (Benicio del Toro), a down-on-his-luck Moldovan nuclear engineer tries to sell two grams of enriched uranium on the black market. Yuri is caught by Anya (Scarlett Johansson), a Hungarian-born Interpol agent pretending to be a buyer for ISIS. They fall in love—but she still puts him away.

2. Maurice (Gérard Depardieu), a plump, nearly retired security guard at a nuclear facility, successfully smuggles spent fuel rods out of a reactor in Chinon, France. He is caught only after he confesses his crime to his village priest.

3. Bailey (Jack Black) and three Vancouver buddies try to steal a truck hauling used nuclear fuel from a Canadian reactor. Hijinks ensues—before they are nabbed by a determined Canadian Mountie (Dwayne Johnson).

As canned as these scenarios—all fictional, I should add—may seem, they are preposterously, ludicrously, and frighteningly closer to reality than almost anyone would realize. Indeed, 419 similar plotlines played out in real life from 1993 to 2013, said Erika Gregory, director of N Square, a two-year-old pilot program designed to spark ideas and build partnerships with the goal of ending the threat of nuclear weapons. That is the number of cases—that we know of, she says—in which nuclear or radiological materials were smuggled or stolen worldwide during those years.

Gregory spoke at a riveting (and scary) roundtable discussion at Fortune’s Brainstorm Tech conference Tuesday afternoon. She was joined by acclaimed author Eric Schlosser—whose recent book, Command and Control: Nuclear Weapons, the Damascus Accident, and the Illusion of Safety, was a 2014 finalist for the Pulitzer Prize—and Brian Finlay, CEO of the nonprofit Stimson Center, a nonpartisan think tank devoted to finding solutions to major global challenges.

The very lucky common denominator in these 419 scenarios, each of the speakers pointed out, was that all of the smugglers were caught. But with 16,000 nuclear weapons still siloed and stockpiled around the globe—and with more than 400 nuclear power reactors in operation, and untold amounts of radiological material (for medical, construction, and mining uses, for example) resting in weakly controlled environments—it may be only a matter of time until luck runs out.

If there was a ray of good news that emerged from the discussion, it was that private enterprise may offer the best hope for easing this cataclysmic threat. Private industry, said Finlay, “moves faster, is more innovative, and can operationalize solutions to challenges much more expeditiously.” Part of what his organization does is to serve as a broker between private enterprise and government, trying to find that “shared value” on grand challenges like the proliferation of nuclear weapons.

Stimson is studying the private insurance marketplace, for instance, to see if there’s a way to create incentives for nuclear power operators to breed in better security standards. It’s working with tech firms to figure out ways to identify and screen supply chains of companies that sell so-called “dual use items” (things like special vacuum tubes, for example, that can be used in both commercial applications and for generating weapons-grade material). And it’s working with data-analytics firms at major ports to help spot smuggled radiological cargo.

The work hasn’t gotten much attention yet, unfortunately. Maybe they should cast Jack Black in a promo.

First U.S. Cruise Ship Docks in Cuba Since 1978: Here’s What They Saw

When the Carnival cruise ship Adonia left Miami and arrived in Havana on Monday morning, it became a part of Cold War history. The Adonia, which is part of Carnival’s Fathom brand, is the first U.S. cruise ship to dock in Cuba in almost four decades, and a sign of thawing relations between the two countries.

The Florida Sun-Sentinel noted that the cruise started with salsa bands in the terminal and on board, and a welcome from Carnival Corp., CEO Arnold Donald and Fathom brand president Tara Russell; and free drinks.

“We’re going to sail directly from the United States to Havana, Cuba,” the captain said over the ship’s PA system. “How awesome is that? Tomorrow we will make history.

The renewal of commercial travel was made possible after U.S. President Barack Obama and Cuban President Raul Castro agreed to ease the strained relations between the two countries in December 2014. President Obama approved the resumption of U.S. cruises to Cuba the following year.

The U.S. blocked the Florida Straits after 1962’s Cuban Missile Crisis, which brought the world within inches of a full-scale, global nuclear war. But the new state of détente between the U.S. and Cuba now makes it possible for thousands of ships to cross the straits each year and provide a significant boost to the tourism industry of the tiny island nation.

U.S. cruises are expected to infuse the Cuban economy with more than $80 million a year, according to a report released today by the U.S.-Cuba Trade and Economic Council. John Kavulich, who heads the council, said that cruise companies would pay the Cuban government $500,000 per cruise, while tourists were expected to spend approximately $100 each in every port they visit.

Carnival said that the Adonia will make two trips per month from Miami to Havana, with stops in Cienfuegos and Santiago de Cuba, at a cost of $1,800 per person for the week-long tour. Cruise officials said six of the passengers on this historic journey are Cuban.

Sunday’s historic journey almost didn’t set sail with any Cuban-Americans onboard. Carnival had initially refused to allow Cuban-Americans aboard the cruise, in order to comply with a law dating back to the Cold War. However, several protests, a discrimination lawsuit and criticism by Secretary of State John Kerry led the cruise line to lift the ban.

Those who still have grievances with the Cuban government were not thrilled with the recommencement of travel. Protesters demonstrated outside of the port, and as the Adonia was preparing to leave Miami, police stopped a nearby boat with the word “Democracia” painted on its side.

Demonstrators aboard the boat held a sign that read, “Castro why do you ask Cubans for a Visa to visit their own country?”

Passengers waiting to board the ship did not seem to share the protesters’ sentiments. Tourist Gary Carlson told CNN on Sunday that the remaining animus is a relic of the distant past, and that it should be left there.

Albania Is Auctioning Off Soviet-Era Fighter Jets Starting at $9,000

It’s tough to find a good deal on a fighter jet these days. But if you’re willing to put a little time and money into a restoration project, the formerly communist republic of Albania has a deal for you.

In an effort to modernize its decidedly not-modern military, Albania is preparing to auction off a few dozen early Cold War, vintage fighter jets—most of which date back to the late 1940s or 1950s—at prices starting at just around $8,600.

A rush of interest surrounding the auction has already pushed Albanian authorities to push back the event once as well as to consider raising the starting bids for the 40 aircraft up for grabs. It turns out museums and collectors of Cold War and aviation memorabilia from across Europe and the United States have expressed overwhelming interest in the ancient fleet of fighter jets in particular—some of which Albania kept flying up until 2005.

Those aircraft include MiG-15, MiG-17, MiG-19, and MiG-21 fighter jets as well as Yak-18 trainer aircraft and four Mi-4 transport helicopters. Some were procured from the Soviet Union until Albania broke ties with the USSR in 1962. After that, Albania’s communist (and increasingly paranoid) regime continued to procure Soviet aircraft and spare parts from China for another 15 years or so, when relations with that country also deteriorated.

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Increasingly friendless and isolated during the remainder of the Cold War, Albania’s regime continued to keep its aging fleet in the air as concerns of invasion by an encroaching Soviet Union continually rattled Balkan States throughout the 1970s and 1980s. At the end of the Cold War, Albania had something like 200 jets and 40 helicopters on hand, not to mention very little money with which to maintain them.

Twenty-five years on, Albania—now a NATO member and an official candidate for EU membership—is still trying to modernize its military. Its aerial defenses have already been bolstered by the purchase of several far more fuel-efficient, Western-built helicopters. The sale of its antique, fixed-wing fleet will fund further improvements to its armed forces.

Albanian Defense Minister Mimi Kodheli tells the Associated Press that the auction—the date of which has not yet been set—will be something of a market test. If it does well, Albania has another 100 ancient aircraft it plans to unload at some point in the future.

You Can Buy This Nuclear Bunker For Less Than a Million Dollars

It’s underground, has no windows, and will protect you from a nuclear war. It is also yours for £575,000 ($850,000).

The property in question is a nuclear bunker situated at the edge of Ballymena, a town northwest of Belfast in Northern Ireland. Built by the U.K. government in the 1980s during the Cold War, it is believed to be one of the last bunkers of its type still standing, according to the listing by agency Lambert Smith Hampton.

The 46,383 square foot-bunker contains 236 livable rooms and has two floors, one completely underground. Interested buyers will have to buy it from the Office of Northern Ireland’s First Minister and Deputy First Minister, who own the bunker.

The existence of the bunker wasn’t even widely known until 2007, as it was a state secret until the BBC unearthed it during a Freedom of Information Act filing on Northern Irish nuclear bunkers, reported News Letter.

“This is an extremely rare listing and offers a unique opportunity for potential buyers,” Andrew Fraser, the firm’s surveyor, told The Irish Times. He said interest in the property is expected to be high and believes the bunker can be transformed into a tourist attraction or an emergency home in case of World War III.

New rules will make it easier to do business in Cuba

The Obama Administration continued to bring down trade barriers between the United States and Cuba on Friday, as the Treasury and Commerce Department announced the easing of several regulations, according to a report in the Associated Press.

The changes will, “simplify procedures for tourism, telephone and Internet investments, and money transfers to Cuba,” according to the report, and will take affect on Monday.

The moves come just weeks after the United States and Cuba reopened embassies in each others’ capitals, and during a year in which travel and other business restrictions have been lifted by President Obama. It will take an act of Congress, however, to lift a wider embargo on trade between the U.S. and Cuba.

“This period now affecting our relations will be a long one,” Interfax reported Lavrov as saying Monday, putting the blame for the deterioration of relations squarely on the U.S.’s refusal to accept the rise of other powers after two decades of the post-Cold War ‘Washington Consensus’.

The E.U.’s decision to fall in with U.S. policy on Ukraine and join it in applying sanctions has angered Moscow, which had counted on the importance of their bilateral trade relations–especially in energy–to protect it. Instead the E.U., like the U.S., has banned Russia’s largest banks from its capital markets and limited sales of high-tech goods to its crucial oil sector.

Europe’s de facto leader, German Chancellor Angela Merkel, had told the Bundestag before meeting with Putin Thursday and Friday that she wanted Russia to withdraw its troops from Ukraine, allow independent monitoring of the Russia-Ukraine border, and support free regional elections in the disputed provinces of eastern Ukraine under Ukrainian law.

“We won’t agree to any criteria and conditions of the sort,” Lavrov told the NTV channel Sunday, saying that Russia was already doing more to end the crisis than anyone else.

“We can find a way out of the present crisis and will help our Ukrainian brothers agree on how to restructure their country,” Lavrov said, in a reference to Moscow’s support for the “federalization” of Ukraine. The two regions partially held by pro-Russian rebels, Donetsk and Luhansk, have said declared independence and won’t accept anything less.

For all the defiance, pressure on the Russian economy is slowly mounting under the combined influence of sanctions and, more importantly in the short term, the sharp drop in the price of oil, its main export. On Friday, Moody’s Investor Service cut the country’s long-term debt rating to Baa2, only two grades above junk status, with a negative outlook.

The ruble has weakened to a series of all-time lows against the dollar, despite the central bank softening the decline with billions of dollars of foreign exchange interventions.

At the weekend, Russia agreed to a temporary compromise–proposed by the E.U.–on resuming gas supplies to Ukraine at a price 20% below what it had previously asked for. OAO Gazprom had stopped supplying it in May citing unpaid bills of $5 billion for past deliveries.

The deal should avert the risk of a shutdown in crucial supplies to some E.U. countries this winter, but it’s unclear how Ukraine will pay for the deliveries. The country is on the verge of bankruptcy after the annexation of Crimea and the war in the east wrecked its economy. Industrial production in September was down 16.6% from a year ago due to collapsing output in Donetsk and Luhansk.

Riding out the business storm in Russia and China

China and Russia are important to Sam Allen, CEO of Deere & Co. DE, the Moline, Ill.-based maker of farm and construction equipment. Those two countries aren’t huge contributors to Deere’s $38 billion in 2013 revenue, each accounting for only 2% to 4% of the total. But for any company in Deere’s businesses, they matter a lot to future growth. Much of China’s farming remains startlingly primitive, sometimes conducted by hand on tiny family plots; government leaders know the world’s most populous nation must produce far more of its own food. Russia – and Ukraine – are major grain producers for Europe as well as for their own citizens.

Allen talked recently with Fortune’s Geoff Colvin about how he’s managing in China’s and Russia’s changing business environments.(For more on the challenging new realities for Western companies operating in those countries, see The New Cold War on Business.) Edited excerpts:

On China:

We’ve seen a tremendous number of Chinese competitors enter the market in the past 24 months. A year ago I was told there were 11 new tractor manufacturers in the previous 18 months. So huge overcapacity has been put in place.

As the Chinese government goes about implementing policy changes to support its stated direction, involving transfer of land to create bigger farms and use bigger equipment, it hasn’t been implemented as effectively as one might expect. Subsidies [for purchasing farm equipment] are not available on time, so customers can’t buy, or subsidies are pulled on certain products on short notice.

And as indigenous Chinese companies get bigger, it appears the government is starting to align with their favorites, those that can compete on a broader scale. They can get attractive financing at almost no interest rate. But the most difficult thing we’ve seen is, there’s a subsidy list, and you’re supposed to put your product in the field, then after a year you can apply for the subsidy, and after another year you can be granted the subsidy. But we’ve had Chinese competitors that didn’t even have a product a year ago, and they’re on the subsidy list.

We have a Chinese national leading our efforts—he was educated in the U.S.—and we have elevated that person’s decision making capability. You can’t make those decisions over here. You’ve got to be very nimble—boots on the ground—that’s what we’re doing. And we need continuous innovation; the product has to be differentiated enough that the customer says, I really want your product . We’re looking at markets worth winning. We don’t want to compete in all ag products in China. We’re focusing on those critical few that are worth pursuing. And then we’re focused on riding out the storm.

On Russia:

[In early September] I spent three and a half days in Russia, then a day in Kiev. In Kiev I was meeting with our embassy, and then with the ag minister, then with the 23 people we have in Ukraine. [Before that] I went to our factory in Moscow, then Krasnodar near the Ukraine border and opened a new dealership.

Farmers and the dealers in Russia have a view that they’re going to get through this. They were somewhat upbeat because they’re having record harvests, it appears. In our Moscow office we have 300 people. Russians, even young Russians, 80% of them think Putin is right [in Ukraine]. I thought the highly educated person would have a different perspective, but most people view the issue as righting a wrong—the wrong being that [the late Soviet leader Nikita] Khrushchev should never have given Crimea away. Our people in Ukraine were definitely nervous, but not people in Russia—it seemed far removed from daily life.

It’s certainly having an impact on our business. Some of our customers have had trouble getting financing, and things have slowed down quite a bit. We’ve agreed how much exposure of working capital we’re willing to accept, and we’re going to run the business within that, even if we could make more.

A Canadian runs our business in Russia; the CFO is an American. They said they’ve seen no hostilities toward us in Russia. We’re asking our people in Russia and Ukraine not to get distracted by the relations between the countries and to focus on the health of our customer base.

The [U.S. and European] sanctions [on Russia] are not directly impacting us, but we’ve found that the challenge is, as they sanction the banks, our suppliers and some customers did business with those banks, so we’ve had to find work-around solutions. It hasn’t prevented us from doing business, but it’s downsized.

Cold War on Business: The Putin Paradox

Fly into Moscow on Russia’s national carrier, Aeroflot, and you will be treated to a dose of nostalgia. The flight attendants are decked out in Soviet red, their jackets and hats emblazoned with the hammer and sickle of the Communist Party, which ruled this country with an iron fist during much of the past century.

Don’t be fooled by the airline’s vintage branding. The road from the airport into the city makes it clear that those days are long gone. Dozens of billboards line the highway, pushing not party slogans but modern-day dreams to Russia’s 143 million people: chic global fashion brands, European luxury cars, and much more. Welcome. You’ve landed 23 years after communism’s collapse—in a country that is once again engaged in a game of chicken with the West.

This time around, Russian President Vladimir Putin and his American and European counterparts do not appear to have their fingers poised over their nuclear buttons. Yet the enmity that has riven the two sides is real. It has imperiled multibillion-dollar deals and could ravage business relationships for years to come, as well as pummel the earnings of countless U.S. businesses, from oil producers to investment banks.

The escalating tension this year is depressing. It started with Russia’s seizure of Crimea from Ukraine in March, and it has been followed by a cascading series of punches and counterpunches: U.S. sanctions on Kremlin officials, Putin’s support for Ukraine separatists, more penalties against Russia, and then counter-sanctions as Russia banned the U.S., the European Union, Norway, Australia, and Canada from selling billions of dollars’ worth of fruits, vegetables, fish, and meats to Russia. The downing of the Malaysia Airlines jet over eastern Ukraine, struck apparently in error by rebels using Putin-supplied rockets, killed 298 people and prompted yet another round of sanctions. These restricted credit to some of Russia’s state-owned conglomerates and banks, which, in turn, hampered multiple deals, such as Exxon Mobil’s Arctic exploration with state-run Rosneft.

The downing of the Malaysia Airlines jet over eastern Ukraine, struck apparently in error by rebels using Putin-supplied rockets, killed 298 people and prompted yet another round of sanctions.Photo: Maxim Zmeyev—Reuters

As the winter closes in, Russians are left to wonder just how steep the price of this conflict will be to their post-Soviet comforts. Will Western leaders, despite their tough talk, quietly ease sanctions, especially since the U.S. has dragged into action a reluctant Europe, 30% of whose gas comes from Russia? Eventually, many Russians believe, the fissures between the U.S. and the EU’s 28 countries will make sanctions impossible to maintain. They could be right.

Yet there is another scenario, which, many observers believe, is just as likely: that Putin, with about $465 billion in foreign cash and gold in Russia’s Central Bank, could try to ride out sanctions, perhaps for years, and emerge even stronger (his approval ratings are above 80%) as the Man Who Faced Down the West. “Putin thinks that neither the U.S. nor the EU is prepared for a hot war in Europe,” according to Stanislav Belkovsky, a political consultant in Moscow. By contrast, he says, Putin conveys a sense that he is not afraid of conflict. “For all the problems in the economy,” he says, “Putin has the scent of victory.”

Which Global Companies Face Risk in Russia

Photo By: MAXIM SHIPENKOV EPA

The West’s deteriorating relations with Russia threaten to close off a rich market for consumer goods. Add an anemic projected economic growth of 0.5% next year, due to the weak rube, and Ukraine-related sanctions, and Russian consumers may be pulling back on everything from Pepsi to Hugo Boss suits. here are some brands with major exposure. —Phil Wahba

1. PepsiCo Russia is PepsiCo’s second-largest market after the U.S. with 2013 sales of $4.9 billion. Decades ago, Pepsi was the first Western branded consumer product made there. But sales are starting to falter, and in July, PepsiCo acknowledged the increasingly “challenging” environment there.

2. Danone Russia is the biggest market for the French dairy company, which bought Russia’s Unimilk in 2010. having 24 plants in Russia reduces the impact of sanctions, but the slumping economy is hurting sales.

3. Carlsberg The Danish brewer reduced its forecast this summer: It now expects sales in Russia, where it is the biggest brewer—the company says it commands 39% of the country’s beer market and operated 10 breweries—to full 6% to 7%.

4. McDonald’s Authorities have closed eight McDonald’s restaurants, pending inspections, so far. Russia contributes less than 5% of total company operating profit, but it has been one of McDonald’s few reliable European markets. the company has doubled its Russian outlets over the past five years.

5. Hugo Boss The German clothier has been dropping the franchise model in Russia in favor of company-owned stores, including a new flagship in a trendy Moscow mall. Sales have slowed in Prague and Budapest because fewer Russians are traveling.

Putin has been turning the screws tighter on Western businesses. Food inspectors began raiding dozens of McDonald’s Russian outlets in the summer and shut down several of them for minor infractions. The order included the iconic McDonald’s on Moscow’s Pushkin Square, which crowds thronged when it opened in 1990 as the first American fast-food joint in Communist Russia.

In late September, Russia’s Parliament voted to restrict foreign ownership of local media to 20%, a move that could affect U.S. companies such as Disney, which has a Russian TV channel, and force the sale of the independent Russian financial paper Vedomosti, which is part owned by News Corp.’s Dow Jones and Pearson. Days later, Putin and Iranian President Hassan Rouhani stated that they would no longer settle their bilateral trade in dollars.

The next day, Russian officials announced they were halting the Future Leaders Exchange Program, in which American and Russian teenagers spend a year in each other’s countries. The government insisted the decision was made because a gay Russian student had applied for asylum in the U.S., but to many it suggested just another chill with the American government. Hearing the news, my interpreter, who was 7 when communism ended, slammed her fist in disappointment. “No!” she said, close to tears. “I really wanted my son to work on his English and go to America on the program.”

Indeed, the prospect of isolation from the West troubles young Muscovites accustomed to their wired, global lifestyle. Starbucks’ 38 Moscow cafés are filled with such urbanites, tapping away on their iPads. There’s no chance that Soviet-style isolation will return, but older Russians see echoes of it in today’s crisis. “It is strange how close we are to a new Cold War,” says banking and media tycoon Alexander Lebedev (Britain’s Independent and Evening Standard newspapers are among his vast holdings), who was a KGB spy in the 1980s during the real Cold War. Sitting in his top-floor office suite overlooking Moscow’s gleaming skyscrapers, Lebedev says he believes economic pressure will not persuade Putin to change his policies.

“Says Deere CEO Samuel Allen, just back from Moscow:

“Russians, even young Russians—80% of them think Putin is right. I thought that the highly educated person would have a different perspective, but most people view the issue as righting a wrong—the wrong being that Khrushchev should have never given Crimea away.”

That may be. But the effects of nearly a year of conflict and sanctions are evident. After years of high growth, Russia, the world’s biggest oil producer, is expected to stagnate next year, with 0.5% growth, according to the IMF. The ruble plummeted to 40 to the dollar in October, about 20% lower than one year earlier. Its free fall has sent Russians scrambling to move money abroad; an estimated $120 billion could leave Russia this year.

There are myriad signs of resistance to Western commerce. French cheeses, Spanish ham, and other delicacies have vanished from supermarket shelves or are now disguised as Turkish or Belarusian, with higher sticker prices. The American-style Chicago Prime steak house near Pushkin Square no longer serves lobster, and its Black Angus steaks now come from a ranch in central Russia rather than Kansas.

The Russia-U.S. standoff is beginning to be felt by American business. In late September, Ford said it could lose about $300 million worth of Russian business this year. Hundreds of deals are frozen as companies attempt to figure out how to comply with new laws. George Kogan, a Russian-born American investment adviser in Moscow, says that years of “fantastic” deals, including numerous IPOs, have run dry: “U.S. hedge funds are all saying, ‘We don’t invest in Russia.’” In Moscow, he says, “people who are handing out jobs and contracts would prefer not to deal with Westerners.” Alexis Rodzianko, president of the American Chamber of Commerce in Russia, says U.S. investment firms are “cooling their heels.”

Most big U.S. corporations operating in Moscow are loath to discuss the sensitivities of U.S.-Russian relations. Many declined Fortune’s requests for an interview. A rare CEO who was willing to speak is Samuel Allen of agricultural equipment giant Deere, back in the U.S. after a trip to Russia. Allen says the sanctions are “certainly having an impact on our business. Some of our customers have had trouble getting financing, and things have slowed down quite a bit.”

Allen says he was struck by the support for Putin. “In our Moscow office,” he says, “we have 300 people. Russians, even young Russians—80% of them think Putin is right. I thought the highly educated person would have a different perspective, but most people view the issue as righting a wrong—the wrong being that [Soviet leader Nikita] Khrushchev should never have given Crimea away” in 1954.

For their part, Russian officials insist they can weather the storm. One government official says that top leaders met last spring to consider the worst possible scenarios and concluded they should build new alliances with China, Persian Gulf states, and others, and begin creating their own products in order to end their dependence on the West. One month later Putin signed a $400 billion deal with China to pipe natural gas to that country for the next 30 years.

The plan sounds optimistic. “If there were an ability to create proper import substitution, it would have been built long ago,” says Andrei Movchan, a co-chairman of Third Rome, an investment group in Moscow. “They failed 100% on that, because they don’t allow private enterprise to flourish.”

Russian tech execs met in Moscow in early October to discuss how to build up their industry, which has lagged for years, as the country imported whatever it needed, largely from the U.S. (where many Russians now work in Silicon Valley). “Oil spoiled us,” says the official. Now Russia needs to innovate, and the record of countries trying to wean themselves from natural resources dependence is, to put it mildly, not good.

As bad as things get, there’s one place in Moscow that reminds Russians that things could be a whole lot worse: the city’s Cold War Museum, which opened a few years ago in a converted bunker. More than 200 feet underground, Soviet officers once monitored the nuclear-bomb control center, braced to launch the missiles that could destroy U.S. targets. Showing a group of locals around the bunker late one night, museum guide Irina Chereponko says the museum “tries to teach the new generation not to repeat the mistakes of the past.” So far, she says, she remains stymied about what to say about Russia’s current conflict with the West. “It will take time to have that perspective about things now,” she says. “Maybe in 30 or 40 years.”

Cold War on Business: Beijing pulls back the welcome mat

The Zeit Berlin German Restaurant inside Beijing’s aging Royal Palace Hotel is the kind of place foreigners can go without attracting much attention. For the German auto executives huddled here on a Wednesday night in late September eating currywurst and downing Hefeweizen beer, that may be the allure. Over the past two months Germany’s carmakers have come under increasing fire in China: Regulators fined Volkswagen’s Audi joint venture $41 million for unfair pricing and announced an investigation into Mercedes-Benz as they continued probing BMW. The automakers, which control nearly 80% of the Chinese premium market and earn large profits here, suddenly found themselves government targets. Their monthly meeting has become part networking event, part therapy session.

“What can you do?” says a BMW finance exec standing in the back of the restaurant as someone from Volkswagen flips through PowerPoint slides of new leasing options in the country. “They’re going after everyone.”

In the past year, Chinese investigations into foreign companies have multiplied dramatically. The number of multinationals in the headlines—and the far bigger fines they have incurred compared with Chinese firms under a six-year-old antimonopoly law—has prompted fears inside the world’s boardrooms that China is going after foreign companies.

The list of targets reads like an all-out assault. Over the summer, six infant milk powder companies, including Illinois-based Mead Johnson Nutrition and Abbott Laboratories, were accused of price fixing and fined $110 million. Then contact-lens makers, including Johnson & Johnson, were fined $3 million for setting minimum prices. Twelve Japanese auto-parts makers were fined $200 million for price fixing this summer. GlaxoSmithKline was fined $490 million in September after a yearlong case in which it was found to have bribed doctors to sell its drugs. After a one-day trial held in secrecy, GSK’s former China head was set to be deported to Britain. Like Volkswagen, the rest of the German automakers are expected to pay hefty fines. Microsoft is being investigated for “monopolistic behavior.” And Qualcomm is facing a possible fine of more than $1 billion for antitrust practices.

“There’s never been anything like this,” says Jim McGregor, who has worked in China for two-and-a-half decades, first as a Wall Street Journal bureau chief, then as CEO of Dow Jones in China, and now as Greater China chairman of APCO Worldwide, an adviser to multinationals. “This is clearly a concerted campaign. Foreign business is being targeted, and so the multinationals are the most negative on China that I’ve seen in 25 years.”

McGregor and others don’t believe the investigations started as an explicit policy by Beijing to pressure foreign companies. Rather, a confluence of events seems to be driving them. The first is political. The administration under President Xi Jinping and Premier Li Keqiang took over a Communist Party rife with corruption nearly two years ago. Their unprecedented campaign against thousands of comrades, including a former member of China’s top Politburo Standing Committee, has shifted to the next target on behalf of average citizens: “greedy multinationals.”

Second, Chinese regulators are scrambling to stay relevant amid reforms. The country’s leaders proposed reducing China’s dependence on state planning in favor of market forces last year during the country’s agenda-setting Third Plenum session. “You’ve got regulators out there desperately trying to prove their worth,” says McGregor. One of the regulators using China’s antimonopoly law against foreign companies, the National Development and Reform Commission, happens to also direct state planning.

THE NEW RULES FOR DOING BUSINESS IN CHINA

Photo: Greg Baker—AFP/Getty Images

1. Differentiate yourself: Beijing has welcomed Telsa with open arms because the government is eager to popularize electric vehicles. “What are you doing for China?” says Jim McGregor, author of One Billion Customers. “You have to tell your story so you’re not the ripest target.”

2. Don’t expect due process: In China’s crackdown on government corruption, officials are being detained without charges. Antitrust investigations won’t be totally different. Prepare for it. “I can guarantee Microsoft and McDonald’s see this as a cost of doing business,” says Adil Husain of consultancy Emerging Strategy in Shanghai.

3. Hang tough.: McGregor included advice in One Billion Customers that rings true today: “The Chinese will ask you for anything because you just may be stupid enough to agree to it. Many are.” Don’t be..

What’s more, it appears the new antimonopoly law is being used to implement industrial policy. China’s attitude toward paying royalties on patents has long been, “Why are we paying to use technology we build?” By going after Qualcomm for chip prices, the government is reducing costs and opening the market for domestic “national champions” like Huawei. “There’s a clear pattern of using the antimonopoly law to favor Chinese licensees of intellectual property,” says Jones Day antitrust lawyer Sébastien Evrard in Hong Kong.

Foreign investigations have sparked a war of words in the media and in government halls. The European Union Chamber of Commerce in China came out firing first in August, saying its companies were being forced into confessions of guilt without due process. “Competition law should not be used as an administrative instrument to harm targeted companies,” the Chamber said. The U.S. Chamber of Commerce in China followed up a month later, releasing a survey in which half of responding companies said they believed foreign firms were being singled out in attacks. Then U.S. Treasury Secretary Jack Lew joined the fray, reportedly writing a letter to his Chinese counterpart warning him that the investigations were sending the two countries down a dangerous path.

The backlash has grown so vehement that China is taking the rare step of responding to criticism. In September, Premier Li, the country’s second most powerful leader, said that only 10% of antimonopoly investigations involved foreign companies. Two days later, on Sept. 11, the country’s three regulators in charge of enforcing the antimonopoly law staged a press conference to reinforce the message. “Based on facts under the antitrust laws, we will investigate companies,” said the NDRC’s antimonopoly head, Xu Kunlin.

Even if that percentage of foreign investigations is accurate—and there are reasons to doubt it, not least because China hasn’t released the full slate of investigations, and foreign firms have incurred far bigger fines than domestic companies—the investigations are scaring foreign companies for other reasons. An antitrust lawyer working in China told Fortune that the NDRC is widely known for bullying: It encourages companies not to bring lawyers to meetings, often doesn’t inform firms what they are being charged with, and tries to force them to sign written confessions. “We’ve had conversations with some of the antitrust officials in China who have indicated that they view even the request to have a lawyer present as an indication of guilt,” says Erin Ennis, vice president of the U.S.-China Business Council. The NDRC declined to comment to Fortune.

The case against Microsoft is a window into the regulators’ strong-arm tactics. Almost no other foreign company has as good a relationship with the Chinese government as Microsoft. In 2006, when then-President Hu Jintao visited the U.S., he stopped at Bill Gates’ 40,000-square-foot house for dinner before traveling to Washington to meet President Bush. Fast-forward to this summer, when investigators from the State Administration for Industry and Commerce, another regulator in charge of the antimonopoly law, raided Microsoft’s Beijing offices and those of Accenture searching for evidence of monopolistic practices by Microsoft. (Accenture is not under investigation by the SAIC.)

The state press announced that Microsoft’s use of anti-piracy software codes may have violated the antimonopoly law. Regulators also gave Microsoft 20 days to explain questions about Windows’ compatibility issues—this for a company that sells only about one out of 10 of its products being used in the country because of piracy and that (not coincidentally) once said it earned less in China than in the Netherlands.

“The anti-piracy code was pointed out as the means of controlling the market—which just doesn’t make sense,” says Duncan Clark, who’s worked in China for 20 years advising private equity and hedge fund investors in the tech sector at his firm, BDA. The investigation seems almost farcical, he says, but then regulators have different motives. “They’re playing to the gallery. They want to be seen as tough on foreign companies—if they get big fines, investigations, that’s great. What happens now is where it gets more interesting.”

That’s because China runs the risk of alienating foreign partners. Foreign direct investment in China tumbled to a four-year low in August, driven by a decline in the first eight months of the year in investment from Japan by 45%, from Europe by 18%, and from the U.S. by 17%. You can’t directly link falling investments to investigations, especially because China’s slowing GDP growth (this year economists expect the government’s goal of 7.5% growth to be a stretch) also influences how much money foreigners plow into the country. But taken together, they’ve cooled excitement in the Middle Kingdom.

A Decrease in Velocity China’s economic growth has slowed in recent years, and in 2014 the pace of foreign investment has fallen off as well.Graphic Source: National Bureau of Statistics of China via Bloomberg

Government pressure on foreign companies in China is hardly new. In the aftermath of the global financial crisis, China invoked protectionist policies. Before 2009, for instance, the country’s wind-turbine-manufacturing market was dominated by foreign operators, which had 40% market share and the technical know-how. After the financial crisis and China’s $600 billion stimulus package, turbines were required to be sourced from domestic suppliers, and new technical requirements often disqualified foreigners. Local governments in charge of growing the nation’s wind farms “legally washed us out,” says Wolfgang Jussen, former CEO of Germany’s Repower in China. Foreigners’ share of the turbine market fell to 10%. Repower, a midsize turbine manufacturer, stopped production in 2011.

That’s not to say that all of today’s cases against foreigners lack merit. The automakers, for instance, cut prices for some spare parts by 50% after the investigations. They now may be forced to allow their dealers to use non-original spare parts, something the European Commission has taken issue with in the past.

Despite the anti-foreign news, China is still the top overseas destination for companies. “We see the sheer consumer demand here, with 1.4 billion people now, and we cannot neglect it,” says Kurt Keller, president of Asia Pacific for Cleveland-based Parker Hannifin, which makes parts for planes and bulldozers. Dozens of companies say the same. For the most part, even companies under pressure aren’t leaving. “Shareholders anywhere else in the world wouldn’t understand if you did,” says Adil Husain, who runs a consultancy in Shanghai advising multinationals.

But Western execs wonder whether the current crackdown represents the new normal or a crisis to be endured. “I doubt this could go on for more than two, three years,” says CJ Liu, a former VP of Nokia China who runs an executive consultancy in Beijing. “This is the Chinese way—the political and social reforms come and go and come and go.” For the moment, foreigners are hunkered down, waiting for it to pass.

This story is from the October 27, 2014 issue of Fortune.

An earlier version of this story did not make it clear that China’s State Administration for Industry and Commerce visited Accenture’s office to collect documents related to Microsoft. The story has been updated to clarify that Accenture is not under investigation by the SAIC.

The new Cold War on Business

After authorities cracked down on the massive pro-democracy protests in Hong Kong that began in late September, a British firm that provides tear gas to Hong Kong’s police decided to review its sales policy. The optics of the situation, perhaps, made that an obvious public relations decision. But the underlying risk of spreading tensions isn’t limited to traditional politically sensitive industries: In the wake of recent crises every globally oriented Western company should be rethinking its strategy too.

For nations, the geopolitical fireworks—the most incendiary since the fall of the Berlin Wall—don’t add up to a new East-West conflict. No one is talking about a nuclear standoff with Moscow, and Beijing lacks Vladimir Putin’s inclination for conflict with the West.

But corporations face a different reality, as political shifts in China and Russia drive an emerging Cold War on business. China and Russia are intruding into the marketplace on a scale unseen since “globalization” became a buzzword. Beijing has initiated state investigations into dozens of Fortune 500 companies for “monopolistic activity.” In Russia, ratcheting up sanctions over the escalating Ukraine conflict has prompted a frantic unwinding of U.S. business ties. Capital flight from Russia hit $75 billion in the first half of this year, outpacing all of 2013. Moscow has banned food exports from the West and floated legislation that would allow the seizure of foreign assets.

President Xi Jinping of China (left) and Russian President Vladimir Putin shake on the deal in May in Shanghai.Photo By: Sasha Mordovets— Getty Images

Western companies benefit from a globalized marketplace backstopped by universal values that allows them to improve supply chains and reach new customers. They are engineered to compete with other corporations, not governments. Clashing states will force many companies to make painful choices about how they do business—and where.

An uneven playing field in China isn’t new, as anyone who has experienced China’s intellectual property “protections” can attest. Nonetheless, investing in China’s growing consumer class and deep labor force has felt like an overwhelming win-win for Western companies and domestic challengers. But that is quickly changing. After 35 years of unabated growth in China, foreign companies are becoming more expendable. The country’s domestic firms are more sophisticated and competitive in more industries. China is not as hungry for cash or lower-scale technology; foreign competitors have to pay a steeper price for access. In a recent poll, 60% of foreign companies “feel less welcome in China than before”—up from 41% just last year. Foreign direct investment in China plummeted to its lowest level in four years last August. (See “Beijing Pulls Back the Welcome Mat“)

Against this backdrop, President Xi Jinping’s transformational economic agenda is a shock wave for Western firms. Structural reforms, anti-corruption efforts, and financial liberalization could one day make the Chinese market more attractive to foreign companies. For the moment, though, they’ve made the business terrain far less certain.

In order to build support for opening the economy, Xi is clamping down politically and looking to deflect pressure. Hong Kong is caught in the cross hairs. As mainland growth has surged, the city-state has become less economically crucial for Beijing, falling from 15% of China’s GDP in 1997 to less than 3% today. At the same time, Xi is warier of political dissent and Western-style governance than ever before. He has zero tolerance for the sort of political concessions protesters are demanding. Foreign companies operating in China face similar headwinds. Beijing is willing to scapegoat Western firms to appease domestic losers in economic overhauls.

Under President Putin’s leadership, Russia has responded to a cratering relationship with the U.S. by cutting off its nose to spite its face. Sanctions will take a painful toll on U.S.-oriented Russian firms. Their cost of capital has risen, and Russia’s ability to maintain oil production at current levels over the next five to 10 years is in question. Whatever the answer, Putin will stay the course. Indeed, his approval ratings at home remain sky-high. Domestic food producers view the food ban as an opportunity, and for the rest of Russia it will necessitate price hikes and imports from riskier places. (See “The Putin Paradox“)

As China and Russia pivot toward each other, American businesses—and their universal economic values—will struggle to maintain a global foothold.

Western multinationals will increasingly pay the price for geopolitics beyond their control. For example, all signs point to Russian involvement in the recent cyberattack on J.P. Morgan Chase; with 83 million households and businesses affected, it’s one of the most extreme in history. Given the Russian government’s means (well-developed financial hacking expertise) and motive (revenge for American sanctions), this is likely to be just the tip of the iceberg for American companies that will absorb the brunt of Russia’s cyberbarrage.

Washington is no bystander in this game. The American government has played favorites and injected national interest into the IT sector. Google left China amid cyberattacks, pressure to release user information, and Beijing’s favoritism for Baidu. But the Snowden leaks have revealed similar behavior from Washington, which has pressured technology companies to comply with NSA-driven surveillance initiatives. And based on concerns from U.S. intelligence agencies, regulators have tried to prevent Chinese telecom giant Huawei from selling its equipment in the U.S.

For now, most major Western companies in China are riding out the latest storm, concluding that the potential for profit justifies the risk. (In a telling capitulation, Apple CEO Tim Cook expressed “sincere apologies” in the wake of Beijing’s media campaign against his company last year.) Other companies, however, are scaling back or altogether giving up on their China business. Adobe, for instance, is and closing down its R&D in the country.

And as Moscow burns bridges with the West, it is building pipelines to China. A 30-year, $400 billion gas deal—long stalled in negotiations—was rapidly finalized after Moscow dropped its asking price because of deteriorating relations with the West. Russia has also invited Chinese investors into the strategic Vankor oil project in East Siberia. China, for its part, is happy to lock in bargain prices on Russian energy.

A New Axis of Energy: Russia’s Gazprom is building a pipeline to China that will move $400 billion of natural gas over 30 years.Map Source: Gazprom

Russia and China, the two most important points of resistance to a rule-based global marketplace, are now working more closely together. As China and Russia pivot toward each other, American businesses—and their universal economic values—will struggle to maintain a global foothold.

The Soviet-American clash forced nations to choose sides, even if they would have been better off collaborating. The emerging Cold War on business will leave many companies in a similar bind. For companies hardwired to “go global,” these new threats to their very existence in crucial markets should sound major alarms.

Ian Bremmer is the president of Eurasia Group and a global research professor at New York University. Follow him on Twitter @ianbremmer

This story is from the October 27, 2014 issue of Fortune.

An earlier version of this story stated incorrectly that Adobe is closing its headquarters in China. This post has been updated.